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The Libor affair – done… for you big boy!

July 8, 2012

Published in ‘New Europe,’ 8-14 July 2012, page 32

The Libor affairLet’s get to the basics: what’s a bank’s main job? Theoretically, it is to finance the economy (the word ‘to finance’ comes from the Medieval French verb ‘finer’, meaning ‘to complete a business with payment’). Financing, as all banking is a fiduciary activity (‘fiducia’ meaning trust or confidence in Latin). So, everything in banking is about trust; without trust there is no banking. However, the last developments in the banking scandals sphere are here to prove that nowadays banking, especially at top level, is neither about financing, nor about trust — it’s rather about speculating, and manipulation.

The ‘Libor affair’ as the financial press named Barclays Bank’s persistent manipulation of the world’s reference interest rates, over the last five years, is the last in a series of black swans that shook the financial system and global economy. Only here, the risk is not just systemic, it’s about the system itself.

Libor is a set of interest rates for various currencies and terms that serves as the world reference for the bulk of financial transactions; 90% of US commercial and mortgage loans are linked to it, and about 350 trillion dollars of derivatives are connected one way or another to these rates. As British journalist Gillian Tett put it “Libor, like credit ratings, is now hardwired into the system.”

Manipulating Libor is the equivalent of mass printing fake money, that is: stealing the wealth of billions of every-day people, because a change in Libor affects the payment of interest in student loans, small business loans, or mortgages. Compare this with the astronomical profits of the banking industry and the provocative bonuses of top bank executives (£15 million for Barclays CEO in 2011), and you realize the magnitude of fraudulent income transfer from the bulk of society to the “happy few.”

Another troubling element in this affair is the time span of the manipulation. According to US market authority CFTC, Barclays traders manipulated Libor “routinely and sometimes daily” from at least mid-2005. It is surprising that it took market authorities all this time to uncover the scandal. More to it, it’s hard to believe that Barclays acted alone; at present, several heavy-weights of international banking are under investigation, including JP Morgan Chase which is itself involved in another scandal… It seems pretty obvious that everybody knew and everybody partied. To make things worse, there are strong allegations that the Bank of England itself was fully aware of this game, and even indirectly encouraged it.

There are two reasons for playing with Libor: first, hiding the real cost of borrowing for each bank, thus painting a false picture of their financial health; and second, to boost profits through the artificially higher valuation of banks’ derivatives positions. In both cases, the game was really profitable for the banks involved, judging by the cheerful mood in the emails exchanged by the dealers after each shot, like the one saying “Done…for you big boy.”

Finally, the arrogance of Barclays and the other banks involved was reinforced by the trust put in them by the markets and society as a whole. The very method of determining Libor rates was based on trust, given that banks were only making submissions of rates, instead of real deals.

The whole point is, the damage made to the trust and reputation of free markets cannot be redeemed with the $450 million fine paid by Barclays. When a few months ago the then candidate to the French presidency François Hollande called a war against ‘Finance,’ his words seemed extreme; today’s revelations about the methods and ethics of Barclays and co. in manipulating Libor are just as extreme.

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